While car parts aren’t something that typically keep financial markets awake at night, last month’s bankruptcy of United States auto parts maker First Brands - owing between US$10 to $50 billion – has clearly spooked investors who fear the same fate could await other players with hidden exposures to private credit.
Details of First Brands' collapse highlight how the boom in the U.S. private credit industry during the past decade has turbocharged private companies’ ability to borrow money.
While First Brands held $6 billion in high-yield, or “junk”, debt on its balance sheet, the company’s current crisis stems from its “off balance sheet” debt courtesy of private credit lenders.
It was only when the company hired mid-sized Wall Street lender, Jefferies, to help renegotiate the terms of the debt on its balance sheet, that its lenders started asking further questions about its finances.
Undisclosed additional loans
What they discovered was that the company had been carrying billions of dollars in hitherto undisclosed additional loans – a la private debt.
Lenders also discovered that the company had pledged future proceeds from some of its unpaid invoices to multiple creditors.
An investigation has since been established to examine - amongst other things, whether invoices were pledged more than once.
Best known for windshield wipers, the company - which now owns 24 automotive-related companies - filed for bankruptcy protection in the southern district of Texas on 29 September due to creditor concern over the company’s use of murky off-balance sheet financing.
In addition to the speed at which First Brands has imploded, what is also panicking the market is the degree to which other firms have been mirroring similar practices that triggered its demise.
Shadow banking
While the company, until very recently, had a decent cash buffer but it was understood to be using private debt or “shadow banking” to borrow against invoices.
What this allowed it to do was keep debt off its balance-sheet disclosures, which helped the company morph more into a finance company than the supplier of auto parts with 26,000 employees.
Admittedly, the system known as factoring is far from unusual, but when the size of that debt, and who’s holding it, is allowed to be shadowy, problems as witnessed with First Brands can rapidly accumulate.
With First Brands’ debt now trading at substantial discounts to face value, its investors stand to be the biggest casualties.
Is First Brands the canary in the coal mine?
Given that it's historically one of the earliest areas to show signs of stress when consumer credit conditions begin to deteriorate, the auto credit sector is now being flagged as the canary in the coal mine when it comes to these practises.
For example, Tricolor, a subprime auto lender specialising in serving borrowers with limited or poor credit histories, filed for Chapter 7 bankruptcy on 10 September, 2025, after a rapid deterioration in credit performance and mounting financial stress.
Tricolor was an active funder in the securitisation market - where borrowers pledge specific assets for lenders – with multiple lenders claiming rights to the same pools of auto loan collateral.
Incidents with First Brands and Tricolor should remind investors that assumptions around asset quality and recovery can deteriorate rapidly when internal controls are weak and transparency is non-existent.
Mispricing and no transparency
With many players in this space clearly choosing growth over discipline, credit is being mispriced, risks are being papered over, and transparency is declining, especially within asset-backed and private credit markets.
According to Ben Lourie, professor of accounting at the University of California, Irvine, the issues at First Brands and the collapse of Tricolor are intertwined with the former selling cut-price parts, with the latter selling older cars to consumers under economic pressure.
“My guess is the companies went into bankruptcy because the market is not great, and they started doing things they should not be doing. So they went into financial innovation with invoice financing,” Lourie says.
“The fear is that the private debt market has been too hot, and [has been] giving out money, at high interest rates, to companies that just can’t pay it back, and especially to companies in the auto market.”
Fears over what the failure of both companies portends, adds Lourie are highlighting worries about what other issues the private debt markets may face.
PE over IPO
Lourie suspects the private debt market is growing exponentially, with companies pulling their IPOs in favour of raising money in those markets.
Trouble is, there isn’t as much disclosure as there is in the public markets, which only compounds the risk and fear of contagion.
“… somebody is going to have to take on these losses, and eventually it will reach up into the banks.”
Brett House, an economics professor at Columbia Business School, also reminds investors of the underlying risks associated with assets held in the unregulated private debt that aren’t marked-to-market, which values a company’s assets and liabilities at their current fair market value.
“When these assets become impaired, it’s a surprise to markets, because there hadn’t been a gradual updating of information,” House said.
“… we don’t have great transparency on the location and concentration of where these assets are being held. And that can often have knock-on effects that are unanticipated.”
Whether the collapse of an obscure car parts company is the first of many dominoes to fall and triggers a cascading effect through the financial system remains to be seen.